Effective from 6 April 2027, new inheritance tax (IHT) rules could dramatically impact how pensions are treated after death. Whether you’re managing a SIPP, a SSAS, or you’re simply looking to protect your beneficiaries, understanding these changes is essential for your estate planning.
Key Changes: Inheritance Tax on Pensions After Death
Under the new rules, a 40% Inheritance Tax may apply to certain pension death benefits when they are paid out at the discretion of pension trustees. This includes:
- Small Self-Administered Schemes (SSASs)
- Self-Invested Personal Pensions (SIPPs)
When Does the 40% IHT Apply?
Inheritance Tax will be charged when the total value of your estate and pension exceeds the nil-rate band:
- £325,000 per person, plus
- £175,000 residence nil-rate band if a home is passed on to direct descendants.
Who Pays the Tax?
The personal representatives of the estate (not the pension provider) are now responsible for:
- Reporting the pension death benefits
- Paying any applicable IHT to HMRC
- Coordinating with beneficiaries and scheme administrators
Double Taxation Relief: A Small Win
If a pension is taxed under both Income Tax and Inheritance Tax (e.g., if the individual dies after age 75), beneficiaries can reclaim the Income Tax already paid. This helps prevent the same money being taxed twice, although it still creates a complex process.
Payment Deadlines & Administration
- IHT must be paid within 6 months of death.
- Interest will be charged on late payments.
- Pension schemes must provide valuations within 4 weeks.
- Scheme administrators must share beneficiary information with executors or representatives.
Planning Opportunities to Reduce Inheritance Tax on Pensions
While these rules are strict, there are still smart strategies to minimise your tax exposure:
1. Withdraw and Gift Early
- You can withdraw pension funds during your lifetime and gift them.
- If you survive for 7 years, the gift is outside of your estate and IHT-free.
2. Use Exemptions
- Spouses and civil partners are IHT-exempt.
- Charitable donations remain exempt from IHT.
- Death-in-service benefits (e.g., life cover at 4x salary) are IHT-free.
- Joint life annuities for children or partners also remain free from IHT.
3. Advanced SSAS Planning
- Pool family pensions under one SSAS to access liquidity without selling investments.
- Unallocated contributions in a SSAS won’t count toward IHT if a member dies.
4. Pension Recycling
Older family members can withdraw funds and contribute to younger family members’ pensions, a tax-neutral way to transfer wealth.
Inheritance Tax Example: Death After Age 75
Let’s say someone dies with a £100,000 discretionary pension fund and was over age 75.
- IHT (40%) = £40,000
- Income Tax (approx.) = £24,000
- Total tax = £64,000
- Effective tax rate: 64%
Beneficiaries may reclaim Income Tax in some cases, but this highlights how harsh the combined tax burden can be.
Death Before Age 75?
In this case, only IHT would apply, not Income Tax.
FAQs: Inheritance Tax on Pensions (2027)
Q: Are all pensions affected by IHT under the new rules?
No. The tax applies mainly to discretionary pension death benefits in SSAS and SIPP schemes where the estate value exceeds the nil-rate threshold.
Q: Can my spouse inherit my pension tax-free?
Yes, spouses and civil partners remain exempt from IHT on pensions. Make sure they are clearly nominated in your Expression of Wishes.
Q: What if I name my children as beneficiaries?
They could be liable for both IHT and Income Tax, depending on your age at death and how the pension is structured.
Q: Can my pension scheme pay the IHT directly?
Yes. One option allows the scheme itself to pay HMRC, though it must do so within 3 weeks of the valuation.
What You Should Do Now
1. Review Your Expression of Wishes
Make sure your spouse or civil partner is formally nominated to avoid unnecessary tax.
2. Consider Strategic Gifting
If you’re able to withdraw and gift pension savings while alive, and survive 7 years, you can avoid IHT on those amounts.
3. Talk to a Pension or Estate Planner
These new rules add a significant layer of complexity, especially with tighter deadlines and new responsibilities for executors. We can refer you to our preferred partner, Arun Sahota at Fairstone, a pensions and IHT Planning specialist. Click here to find out more.
Final Thoughts
The Inheritance Tax on pensions from April 2027 will change how families pass on wealth through pensions. While the tax rules are stricter, smart planning today can still protect your beneficiaries tomorrow.
Need help planning your pension inheritance strategy? Speak with a qualified adviser to secure your financial legacy.
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